a) What is your after tax wealth if the $25 million are paid as repurchase, assuming that you are able to sell ALL your shares at the repurchase price? b) What is your after tax wealth if the $25 million are paid as dividend,? Assume that the stock market price will decrease exactly on the value of the dividend after the dividends are paid, and that you will sell all your shares after the dividend is paid at the market price. c) Suppose now that you will keep the shares for 5 years after dividends are payed and then sell them, and you expect that the price of the stock increase by 10% per year. What is the present value of your wealth in this case? (Assume a 10% discount rate)
a) What is your after tax wealth if the $25 million are paid as repurchase, assuming that you are able to sell ALL your shares at the repurchase price? b) What is your after tax wealth if the $25 million are paid as dividend,? Assume that the stock market price will decrease exactly on the value of the dividend after the dividends are paid, and that you will sell all your shares after the dividend is paid at the market price. c) Suppose now that you will keep the shares for 5 years after dividends are payed and then sell them, and you expect that the price of the stock increase by 10% per year. What is the present value of your wealth in this case? (Assume a 10% discount rate)
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 12P
Related questions
Question
ff1
![You own 1 million shares in Locos Inc a 100% equity company that your purchased
paying $10 per share. Last week the company was worth $100 million with 10
million shares outstanding. Yesterday the management announced a merge that
increased the company value by $25 million, which will be reflected in the stock
price today. The company is trying to decide whether to issue a dividend or
repurchase shares at the current market price to distribute the $25 million increase
in valuation. Your marginal tax rate on dividends is 30% and 20% on capital gains.
In this question you need to determine what is more beneficial for you, dividends
or repurchases.
a) What is your after tax wealth if the $25 million are paid as repurchase, assuming
that you are able to sell ALL your shares at the repurchase price?
b) What is your after tax wealth if the $25 million are paid as dividend,? Assume
that the stock market price will decrease exactly on the value of the dividend after
the dividends are paid, and that you will sell all your shares after the dividend is
paid at the market price.
c) Suppose now that you will keep the shares for 5 years after dividends are payed
and then sell them, and you expect that the price of the stock increase by 10% per
year. What is the present value of your wealth in this case? (Assume a 10% discount
rate)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F800f14bf-2dac-4c27-8e50-ffc89f4e7038%2F7b47ecf8-6dcd-46f0-a262-6715de01f6c5%2Fm56pz8p_processed.jpeg&w=3840&q=75)
Transcribed Image Text:You own 1 million shares in Locos Inc a 100% equity company that your purchased
paying $10 per share. Last week the company was worth $100 million with 10
million shares outstanding. Yesterday the management announced a merge that
increased the company value by $25 million, which will be reflected in the stock
price today. The company is trying to decide whether to issue a dividend or
repurchase shares at the current market price to distribute the $25 million increase
in valuation. Your marginal tax rate on dividends is 30% and 20% on capital gains.
In this question you need to determine what is more beneficial for you, dividends
or repurchases.
a) What is your after tax wealth if the $25 million are paid as repurchase, assuming
that you are able to sell ALL your shares at the repurchase price?
b) What is your after tax wealth if the $25 million are paid as dividend,? Assume
that the stock market price will decrease exactly on the value of the dividend after
the dividends are paid, and that you will sell all your shares after the dividend is
paid at the market price.
c) Suppose now that you will keep the shares for 5 years after dividends are payed
and then sell them, and you expect that the price of the stock increase by 10% per
year. What is the present value of your wealth in this case? (Assume a 10% discount
rate)
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